June 30, 2010

Spend Now, Save Later? DC's Fiscal Cop Gets It

The new Congressional Budget Office report on the government's fiscal outlook is getting a lot of attention. And rightly so. But the more interesting news from the CBO today may be something its director, Douglas Elmendorf, said in testimony to the bipartisan fiscal commission.

Elmendorf came before the commission to describe the country's fiscal situation, which he sees as bleak. As he has before, he argued that deficits and debt would likely grow without some combination of new tax increases or spending cuts.

But he did not say this situation calls for austerity now, as many politicians--and, indeed, many Americans--are urging. On the contrary, here is what Elmendorf said in his prepared powerpoint slides:

There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.

Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections, or some combination of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery.

[Emphasis mine.]

To be very clear about this, Elmendorf's testimony does not imply government should ignore the long-term fiscal situation. The ideal solution, if you follow Elmendorf's logic, would be to pass tax and spending bills that raised deficits now but reduced them later. If even a few conservatives were willing to talk about such a package, it might have a chance of passing. Instead, conservatives--including the whole of the Republican Party and a depressingly significant fraction of the Democrats--insist we must tighten belts now. Elmendorf obviously thinks otherwise.

Granted, this is nothing Paul Krugman and others haven't said a million times. And it's not like Elmendorf is infallible. He's just a smart economist whose analysis, like anybody's, is open to scrutiny.

But Elmendorf's budgetary pronouncements are famously dour. Conservatives love to cite him in their arguments against spending. If even Elmendorf doesn't see a problem with temporary deficit spending--emphasis on the "temporary"--the rest of us shouldn't, either.